Price Elasticities

3. Elasticities

Study Parkin et al. Chap 4

Why elasticities?

· Analysis not yet considered ‘responsiveness’ by consumers and producers.

Responsiveness of Pe and Qe for a given (Change)SS

· The steeper the demand curve, the more unresponsive the consumers are to a change in price.

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Defining elasticity

· A measure of responsiveness,

· Measured as: % response [%(change)x], per unit change of the variable [%(change)y]

3.1 Demand elasticities

3.1.1 Price elasticity of demand

e _p^D = % change in quantity demanded

% change in price

or

, %(change)Qd / %(change)P

What determines price elasticities?

· Time:

· The greater, the greater the e _p^D

· In VSR, many products highly inelastic.

· Number of substitutes:

· The larger the number, the greater the e _p^D

· # depends on broadness of product definition.

· Item as a proportion of budget

· The larger the greater the elasticity

· Determinants may interact: cannot be considered in isolation.

Elasticity: values and descriptors

· Values

· Zero (perfectly inelastic)

· >0 but <>

· 1 (Unit elastic)

· > 1 but < (elastic)

· (infinite) (perfectly elastic)